What is the difference between fixed costs and variable costs?

The correct answer highlights that fixed costs are expenses that do not change regardless of the amount of goods or services produced, meaning they remain constant over a range of production levels. Examples include rent, salaries, and insurance, which need to be paid regardless of the production output.

On the other hand, variable costs fluctuate directly with production volume. This means that as production increases, these costs increase, and when production decreases, so do these costs. Examples of variable costs include materials used in production and direct labor costs that are directly tied to the output.

Understanding this distinction is crucial for businesses as it affects budgeting, pricing strategies, and overall financial planning. Knowing how costs behave helps in the analysis of breakeven points and profitability, allowing managers to make informed decisions regarding scaling operations and managing resources more effectively.